Dealing with the problems that result from the separation of ownership and control

Internal structure and rules of the board of directors Creation of independent audit committees Rules of disclosure of information Control of the management Transparency of operations Impeccable process of decision-making

Board

Management

Employees

The way in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them How do they make sure that managers do not steal the capital they supply or invest it in bad projects

How do suppliers of finance control managers

Shareholders elect directors who represent them Directors vote on key matters and adopt the majority decision Decisions are made in a transparent manner so that shareholders and others can hold directors accountable The company adopt accounting standards to generate the information necessary for directors, investors and other stakeholders to make decisions The companys policies and practices adhere to applicable national, state and local laws

Shareholder environment

Market model (governance chain) developed markets Dispersed ownership Nonexecutive majority boards

Independence and performance

Corporate context

Sophisticated institutional ownership

Institutional context Capital market liquidity

Aligned incentives

Active equity markets

High disclosure

Active takeover markets

Shareholders equality Transparency and accountability

Shareholder environment

Market model (governance chain) developing markets concentrate d ownership Reliance on family, bank, public finance Under developed new issue market limited takeover markets Insider boards

Independence and performance

Corporate context

incentives aligned with core shareholders

Institutional context Capital market liquidity

limited disclosure Inadequate minority protection

Transparency and accountability

Narrowly can be defined as the relationship of a company to its shareholders or, more broadly, as its relationship to society From narrow concept CG is to conduct the business in accordance with the owners or shareholders desires From the broader concept we link CG practices with country and society laws

Is not just to make changes in board structures and procedure with a view to make accountable to shareholders Should increase independent directors and boards and not to have one person both chairman and CEO Should introduce specific committees such like audit and remuneration committees

Full set of relationships between a companys management, its board, its shareholders and its other stakeholders, such as its employees and community in which its located In 21st century stability and prosperity will depend on strengthening of capital markets and the creation of strong corporate governance systems

Governments play a crucial role in making the legal , institutional and regulatory framework within which governance systems are kept in place

Rights of shareholders Equitable treatment of shareholders Role of stakeholders in corporate governance Disclosure and transparency Responsibilities of the board

Distinguish the roles of board and management Composition of the board and related issues Separation of the roles of the CEO and chairperson Should the board have committees Appointments to the board and directors reelection Directors and executives remuneration

Disclosure and audit Protection of shareholder rights and their expectations Dialogue with institutional shareholders Should investors have a say in making a company socially responsible corporate citizen

Select, decide the remuneration and evaluate on a regular basis, and when necessary, change the CEO Oversee( not directly, but indirectly) the conduct of the companys business to evaluate whether or not it is being correctly managed Review and, where necessary, approve the companys financial objectives and major corporate plans and objectives

Render advice and counsel to top management Identify and recommend candidates to shareholders for electing them to the board directors Review the adequacy of systems to comply with all applicable laws and regulations All other functions required by law to be performed

A committee elected by the shareholders of a limited company to be responsible for the policy of the company There are certain kinds of directors according to their responsibilities

Board of directors

Executive directors

Non-Executive directors

Independent directors

Affiliated directors(nominee directors)

Separation of the roles of the CEO and chairperson

Composition of board is major issue in CG If both authorities with the same then leads to conflicts and concentration of power The role of CEO is to lead the management The role of chairman is to lead the board and evaluate the performance of executives including CEO

Separation of the roles of the CEO and chairperson(cont..)

If both are the same then create problem of check over senior management

d)Should the board have committees

Nomination Remuneration auditing

Appointments to the board and directors re-election

Shareholders elect board In large corporates shareholders scattered, so not possible to gather them So in actual practice specially constituted committees select and appoint the prospective directors and get the approval at annual general body meeting from shareholders

Appointments to the board and directors re-election(cont..)

Shareholders only endorse board nominees, only rare cases refuses board nominees

f)Directors and executives remuneration

Very mixed and vexed issue Shareholders should have clear statement of directors present and future benefits and how they are determined The key points and issues in this regard are transparency, pay for performance, process of determination, severance payments, and pension for non-executive directors

g) Disclosure and audit

Should boards establish an audit committee If yes, how should it be composed? How to ensure the independence of the auditor? What precautions are to be taken or what are the positions of the state and regulators with regard to provision of non-audit services rendered by auditors?

g) Disclosure and audit(cont..)

Should individual directors have access to independent resources Should boards formalize performance standards

h)Protection of shareholder rights and their expectations

Should companies always adhere to oneshare-one-vote principle? Should companies retain voting by a show of hands or by poll Can shareholders resolutions be bundled ? i.e. to place together before shareholders for approval a resolution that contains more than one discrete issue

h)Protection of shareholder rights and their expectations(cont..)

Should shareholder approval be required for all major transactions?

i)Dialogue with institutional shareholders

Institutional investors should maintain regular and systematic contact with companies, apart from their participation in general meetings of shareholders Use their voting right positively Take positive interest in composition of board Recognize their rights and responsibilities

j) Should investors have a say in making a company socially responsible corporate citizen

Benefits of CG
Creation and enhancement of a corporation s competitive advantage Enabling a corporation perform efficiently by preventing . fraud and malpractices Providing protection to shareholders interest Enhancing the valuation of an enterprise Ensuring compliance of laws and regulations

The theory and practice of corporate governance

The process of capital accumulation that facilitates development of economies by fuelling growth of its various sectors such as industry, agriculture, infrastructure, trade and commerce has become institutionalized by the corporation By a company is meant an association of many persons, who contribute money or money's worth to a common stock and invest it in some trade or business, and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The person who contribute it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable, although the right to transfar them is often more or less restricted

Incorporated association Artificial legal existence Perpetual existenc Common seal Extensive membership Separation of management from ownership Limited liability Transferability of shares

The root of this theory taken from Adam smith who identified agency problem( managerial negligence and profusion) The fundamental theoretical basis of CG is agency cost Shareholders are the owners of any joint stock, limited liability company, and are the principals of the same. The principals define the objectives of a company

The management directly or indirectly selected by shareholders to pursue such objectives, are the agents. The principal generally assume that the agents would invariably carry out their objectives, it is often not so. The objectives of managers at variance from those of the shareholders The shareholder and other stakeholders may not be able to counteract this because of inadequate disclosure about such a decision and because the principals may be too scattered or even not motivated enough to effectively block such a move

Such a mismatch of objectives is called the agency problem The cost inflicted by such dissonance is the agency cost The core of CG is designing and putting in place disclosures, monitoring, "oversight and corrective systems that can align the objectives of the two sets of players as closely as possible and hence minimize agency costs

In agency theory terms, the owners are principals and the managers are agents and there is agency loss Agency theory specifies mechanisms which reduces agency loss These include incentives schemes for managers which reward them financially for maximising shareholders interests. Such schemes typically include plans whereby senior executives obtain shares, perhaps at a reduced price, thus aligning financial interests of executives with those of shareholders

Total control of management is neither feasible nor required under this theory Must have to accept a certain level of self interested behaviors in delegating responsibility to others. In agency theory the assumption is with the complexities of investor-board relationship in large organizations, shareholders should have correct and adequate information to wield effective control. Equity investors rarely get these and besides they rarely make clear their exact target returns, and yet delegate authority to meet the target.

In terms of controls, equity investors hardly have sanctions over board, instead, they have to rely on self-regulation to ensure that an orderly house is maintained.

Fair accurate financial disclosure Efficient and independent board of directors

This theory assumes that managers are basically trustworthy and attach significant value to their own personal reputations. The market for managers with strong personal reputations serves as the primary mechanism to control behavior, with more reputable managers being offered higher compensation packages. Financial reporting, disclosure and auditing are still important mechanisms, but there is a fundamental presumption that these mechanisms are needed to confirm managements inherent trustworthiness Corporate insiders are primarily made board of directors

Theory define situations in which managers are not motivated by individual goals, but rather they are stewards whose motives are aligned with the objectives of their principles Given a choice between self-serving behavior and pro-organizational behavior, a stewards behavior will not depart from the interests of his/her organization Control can be potentially counterproductive, because it undermines the pro-organizational behavior of the steward, by lowering his/her motivation

Behavioral differences With regard to Psychological mechanisms With regard to Situational mechanisms

In agency theory managers are the agents of owners while in stewards theory the managers are acts as stewards or trustee Approach is materialistic under agency theory but in later the approach is sociological and psychological The behavioral pattern is individualistic, opportunistic and self serving under the agency theory while it is collectivistic, pro-organisational and trustworthy in the other There is vast difference between the managers and the principals with regard to their interest in the organization; they are divergent in the first theory, while they are convergent in the later

Managers are motivated purely by their own objectives in the first case whereas they are guided by the principals objective in the later Managers role in agency is to monitor and control while in later it is more to facilitate and empower them Owners attitude in organizations of the agency theory is to avoid risk rather than taking it and managing it in the second one Principal manager relationship in agency based upon control while it is relationship based in later

The agency theory states that motivation revolves around lower order and extrinsic needs, while stewardship theory says it revolves around higher order and intrinsic needs. Social comparison is between compatriost while the latter says it is between principals Agency theory says there is little attachment to the company while latter says there is great attachment to the company Agency theory asserts that power rests with the institution, while the latter says it rests with the personnal

Management philosophy is control oriented while stewards theory says that it is involvement oriented To deal with increasing uncertainty and risk, the agency theory advocates exercise of greater controls and more supervisions, while to the later it is the exercise of training, empowering, people, and making jobs more challenging and motivating The agency theory wants risk orientation done through a system of control, while the later says it is done through trust

Shareholder approach: the corporations have limited set of responsibilities, which primarily consist of obeying the law and maximizing shareholders wealth. The basic arguments is that corporations, by focusing on shareholder interests maximize societal utility Stakeholder approach: this model CG argue that those responsible for governance of corporation have responsibilities to parties other than shareholders and that, any fiduciary obligations owed to shareholders to maximize profits might be subject to the constraints of respecting obligations owed to such stakeholders

Focuses mostly on board composition and the implications for power and wealth distribution in society. Problems of interlocking directorships and the concentration of directorship in the hands of a privileged class are viewed as major challenges to equity and social progress. Under this theory board composition, financial reporting, disclosure and auditing are necessary mechanisms to promote equity and fairness in society

National interest Political non-alignment Legal compliances Rule of law Honest and ethical conduct Corporate citizenship Ethical behavior Social concerns Corporate social responsability

Environment-friendliness Healthy and safe working environment Competition Trusteeship Accountability Effectiveness and efficiency Timely responsiveness Corporations should uphold the fair name of the country

Towards shareholders Measures promoting transparency and informed shareholder participation Transparency Financial reporting and records

Fair employment practices Equal opportunities employer Encourage whistle blowing Human treatment Participation Empowerment Equity and inclusiveness Participative and collaborative environment

Quality of products and services Products at affordable prices Unwavering commitment to customer satisfaction

Protecting companys assets Behavior towards government agencies Control Consensus- oriented Gifts and donations Role and responsibilities of corporate board and directors Directorship and management must be distinguished Managing and whole-time directors

Rights and privileges of shareholders

Has right to obtain memorandum of association, Articles of association and certain resolutions and agreement on request Certificate of shares held within 3 months Right to transfer shares in accordance of article of company Right of appeal to company law in case company fails to register transfer of shares Preferential right to purchase shares on prorata basis

Has right to apply company law board for rectification of the register of members Right to apply court in case any variation or abrogation to his /her rights set a side by the court Right to inspect the register and the index of members, annual returns, register of charges and register of investments not held by the company in its own name without any charge

Right receive notices of annual general meetings and to attend such meetings and vote either in person or by proxy Entitled to receive the a copy of statutory report Receive annual report of directors, annual accounts and auditors report Right to participate in the appointment of auditors and the election of directors at annual general meetings

If annual general meeting is not called within prescribed time limit then has the right to make an application to the company law board for calling it. Right to ask directors to convene extraordinary general meeting by presenting proper requisition Can make an application to the company law board for convening an extraordinary general meeting of the company where it is impracticaple to call such a meeting either by the directors or by the members themselves

Entitled to inspect and obtain copies of minutes of proceedings of general meetings Right to participate in declaration of dividends and receive his/her dividends duly Right to demand poll Right to apply court for investigation of the affairs of company Right to remove a director before expiry of term

Right to make an application to the company law board for relief in case of oppression and mismanagement Can make petition to the court for winding up of the company under certain circumstances Right to participate in passing of a special resolution that the company be wound up by the court or voluntarily Right to participate in the surplus assets of the company, if any, on its wound up

To receive interest/redemption in due time To receive a copy of trust deed on request To apply for winding up of company if fails to pay its debt To approach the debenture trustee with the debenture holders grievance

Remain informed To be vigilant Participate and vote in general meetings To exercise ones rights on ones own, or as a group

Corporate governance and other stakeholders

Conventional model of CG focus on primacy of shareholders Left out the role of employees in wealth creation Western reforms promoted the concept of shareholder capitalism Today the growing recognition, that human capital is a source of competitive advantage Labor is, if not, more important at least as important as, capital Knowledge created by employees is most valuable asset in corporations When a company acquire another company they value human capital more than its financial assets

Trade unions Co-determination: employee representation on BOD Profit sharing Equity sharing Team production solution: situation where the BOD must balance competing interests of various stakeholders and the arrive at decision that are in the best interest of the organisation

Voluntary participation Extend benefits to all employees Clarity and transparency Predetermined formula Regularity Avoiding unreasonable risk for employees Clear distinction Compatibility with worker mobility

Consumers are the king and sovereign who decides through the market forces the quality and quantity of goods produced Consumer satisfaction is the sole purpose of an enterprise exists and therefore should be treated with respect in reality If consumer is given raw deal_ sub-standard products, increased prices through market manipulation, failed warranties, poor after-sale services, and host of other unfair trade practices befalls his lot

Financial statements only reveal internal costs to entity but not the uncompensated and hidden costs bear by the society

Detailed legal record regarding goods and services which should also cover such information as product liability, injury, unwarranted death claims over the past five years Risks of injury caused in case of use Problems relating to their usage such as noise Provisions ,if any, for recycling of products Packaging of products Unexpected lifecycle costs, such as repairs, energy consumption and disposal that have to be born by ultimate consumers

Warning concerning possible contamination and adulteration, exposure and risks during the process of production, shipping, marketing and storage, providing everywhere appropriate details In case of food articles and medicines provide such details like contents additives and treatments to enable reasonably informed consumers to make rational choices and market decisions. Unseen characteristics of products

Banks, insurance companies, state financial corporations, development oriented institutions

Financial results and solvancy Financial statement and annual reports Composition and quality of board Investor communications Corporate governance practices Corporate image Share price

Banks and other creditors have an extremely important role to play in fostering efficiency in medium and large private firms. Creditors in turn, rely for their survival on debt repayment by their borrowers. Without dependable debt collection, no amount of supervision or competition can make banks run efficiently. Strong creditors are as critical to the efficient functioning of enterprise as are strong owners

Adequate information Creditor incentives Debt collection

Diffused debt Concentrated debt

Board of Directors

Can be define as a person having control over the direction, conduct, management or superintendence of the affairs of a company. Any person in accordance with whose direction or instruction, the board of directors of a company is accustomed to act is deemed to be a director of the company

shareholders

Board of directors

Executive committee

Chief executives and senior executives

Board of directors

Executive directors

Non-Executive directors

Independent directors

Affiliated directors(nominee directors)

First set of directors?( articles of association, MOA) Subscriber of MOA as first directors Subscriber s will be directors until directors are not selected by normal procedure

An agent Trustee Managing partner

Fiduciary duties Duty of care, skill, and diligence Duties to attend board meetings Duties not to delegate their functions except to the extent authorized by the act or the constitution of the company

No corporate , association or firm could be the director Must be an individual Competent to enter into a contract Hold a share qualification if so required by AOA

A person of unsound mind An un-discharged insolvent or one whose petition for declaring himself so is pending in a court A person who has been convicted by court for any offence involving moral turpitude A person whose calls in respect of shares of the company are held for more than six months have been in in arrears Disqualification for appointment as director by court on grounds of fraud or misfeasance Shareholders can make him disqualify Central or federal government The company law board

Make calls on shareholders in respect of money unpaid on their shares Issue debenture Borrow money for banks or public deposits Invest the funds of company Make loans Fill vacancies in the board To sanction or give assent for certain contracts in which particular directors, their relatives and firms are interested To receive notice of disclosure of directors interest in any contract or arrangement with the company To receive notice of disclosure of shareholdings of directors

To appoint as managing director or manager a person who is already holding such post in another company To make investment in companies in the same group To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company To remit or give time for repayment of any debt To borrow in excess of capital To contribute to charitable and other funds not relating to the business To invest compensation amounts received on compulsory acquisition of any companys property To appoint a sole selling agents

General meeting of shareholders competent to intervene and act in respect of matters delegated to BOD Directors act mala fide The directors themselves are wrongdoers The board as a whole is found to be incompetent, when for instance all directors are interested in a transaction with the company There is deadlock in management There is fit case for shareholders to exercise their residuary powers

 a) b) c)

d)

Liable to third party(SECP) with respect to discrepancy in MOA, AOA, prospectus Director may incur personal liability under the act of the following conditions On failure to repay application money if minimum subscription has not been subscribed On irregular allotment of shares On their failure to repay application money if the application for the securities to be dealt in on a recognized stock exchange is not made or refused On failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order for money or goods wherein the name of the company is not mentioned in legible characters

By signing a negotiable instrument without the companys name and the fact that he is signing on behalf of the company, he is personally liable to the holder of such Enter into a contract which is ultra wire Personally committed a fraud

Ultra wires acts Negligence Breach of trust Misfeasance: willful default

Director should carryout several statutory duties most of which relates to the maintenance of proper accounts, filling of returns or observance of certain statutory formalities

A director is not liable for the acts of his codirectors provided he has no knowledge and he is not to party it

 a) b) c) d) e)

Court can provide relief in following matters Negligence Default Breach of duty Misfeasance Breach of trust against an officer

The liability of directors will be considered unlimited unless or until the resolution in MOA is not passed for the extent of liability

Acts done by a person shall be valid, but if prove that he gain this position through misleading of fact or by doing illegal acts then his acts will be considered as invalid

A director who is not dully appointed but acts as a director is known as de facto director and is as much liable as a de jure ( appointed as per law)

Small size of the board Independence of the board Diversity of the board A well informed board The board should have a longer vision and broader responsibility

ROLE, DUTIES AND RESPONSABILITIES OF AUDITORS

The independent examination of any entity, whether profit oriented or not and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon

Financial statement audit Compliance audit Operational audit

A person appointed by a company to perform an audit. He is required to certify that the accounts produced by his client companies have been prepared in accordance with normal accounting standards and represent a true and fair view of the company

Internal auditors Independent auditors Government auditors

Ensure security against loan properly secured Transaction made are legal and in the interest of company Ensure the assets and securities of company sold and purchased properly Whether loan and advances made by company have been shown as deposits Whether personal expenses charged to revenue account Statements of accounts are drawn up on the basis of books of business Above Statement drawn showing true affairs Ensure management not exceeds the power given by AOA

Give opinion on reliability and sufficiency of statements Relevant information disclosed properly Not expected to perform which fall outside his scope

Professional requirements: independence, integrity, objectivity, confidentiality, professional behavior Skills and competency Assignment: assign peoples in accordance with the demand of assignment Delegation: sufficient direction, supervision and review of work at all levels to provide reasonable assurance Consultation Acceptance and retention of client monitoring

BUSINESS ETHICS AND CORPORATE GOVERNANCE

Science of morals Describe a set of rules of behaviors In business defines what is right and morally good for business

Conception of right and wrong behavior Business ethic is the application of general ethical idea to business behavior It prevents harm to society, improves profitability, foster business relations and employee productivity, reduce criminal penalties,

Ethics closely related to trust To develop trust behavior should be ethical Trust could be use as the indicator of ethic Trust is three dimensional: trust in supplier relationship, trust in employee relationship and trust in customer relationship Trust leads to predictability and efficiency of business Earlier the slogan was the business of business is business but now changed as business of business is ethical business

Protect its own interest Protect the interest of business community To keep commitment to society Meet stakeholders expectations Prevent harm to general public To build trust with key stakeholders Protect themselves from abuse Create an environment in which workers can act in ways consistent with their values Values help better decision making

Bribery Coercion: forcing a person to act in a manner that is against the persons personal belief Insider trading Tax evasion conflicts of interests pollution

Attention to ethics has substantially improved society Can contribute towards high productivity Changing situations require ethical education Ethical practices create strong public image Strong ethical practices act as insurance

Lower economic growth Dominant public sector Lack of effectiveness of privatization Lack of awareness among shareholders Greater government influence, and less autonomy to enterprise Internal owner dominate more than a companys external owner Concentration of ownership External owners do not have enough power Lack of strong legal protection Capital market are under develop Internal abuse of information Redrawing and updating of property laws are slow in coming

Lack of well regulated banking sector Exit mechanism, bankruptcy and foreclosure norms are absent Sound security market does not exist Do not have competitive markets Corruption and mismanagement Non-uniform guidelines

Property rights Contract law A well regulated banking sector Exit mechanism: bankruptcy and foreclosure Sound security market Competitive market Fair and transparent privatization Well functioning judicial system Anti- curruption strategies

Reform government agencies Strengthen administrative and enforcement capacity of government Establish routine mechanisms of participation Investigative and well informed media Strengthening reputational agents